Is your startup a feature, a product or a business?

Through my development as a junior VC, I regularly find myself asking questions similar to those of my entrepreneur friends.

Without many ghosts of pitches past, I glean knowledge from others’ refined judgement and execution. Take it this way: venture capitalists are paid to act on a point of view, ideally one that proves profitable. But how do VCs identify what will return multiples on their money, many times years ahead of an outcome? What do they pay attention to when making such decisions?

Even the most basic of feedback can seem confusing.

Just one thing

Frequently, founders are told “Do one thing and do it well.” Instagram is an oft-cited winner that honed in on a simple task: mobile photo sharing. Instagram’s former self, Burbn, was scrapped after feeling cluttered and overrun with features, with its wider offerings around location check-ins and social event planning. Instagram CEO Kevin Systrom said, “Focusing on one thing and doing it really, really well can get you very far.” In fact, $1 billion far.

Cue envy. Cue funding funneling to players riding at the coattails. There were so many Instagrams for video at one point that The Next Web felt compelled to pick just the top ten.

But as we’ve seen, the ecosystem can bear fruit to many winners. Spark Capital’s Andrew Parker astutely cut up the Craigslist homepage to show how the directory has given way to category-oriented companies like HomeAway, OkCupid, and StubHub. It’s an image regularly shared across the web, though infrequently commenters address Parker’s amazement of how Craigslist continues to compete, “if not dominate”, with basic HTML/CSS UI and fewer features.

Google, Yahoo, and more recently Mailbox are other examples that were turned away, or funded, based on subjective viewpoints of their status. Where did startups like Disqus and UserVoice first fit in? Attempting to find the common thread was perplexing.

Pulling discussions together, features perform an action. Products, normally a package of features, solve a problem. Businesses, potentially a package of products, provide recurring value to users. Ideally, these users offer up some measurable currency (data, time, cash) in exchange, otherwise it is not a particularly sustainable business. Do keep in mind that what may be disruptive and novel today may only be a button on a page tomorrow, shifting investors’ attitudes accordingly. Further, it could be argued that at the early stage investors almost never see full-blown companies, but kernels of opportunity through features and products.

Venture capitalists evaluate the size of an opportunity centered on one primary ‘thing’: anticipation. Investors anticipate the behavior of competitors (current and prospective) and customers (also current and prospective), before checking into any concerns regarding management, the government, and black swans. Their interest is to pinpoint, then pile their time and capital into, high potential exits. They place bets on predictions, encouraged by evidence.

When considering competitors, VCs will ask, “What is challenging to replicate?” With incumbents and future contenders boasting perhaps more talent, funding, and scale, where is the edge? For some, this may be their sticky network (Evernote, Buzzfeed, WhatsApp), for others, a growing pool of insightful information gathered from complex algorithms (Palantir, bitly, Etsy). Is this particular opportunity unassailable?

When considering customers, venture capitalists will ask, “What are the trends?” Where are the signals indicating that people are climbing over themselves to be a customer and evangelizing the solution to peers because it is simply so special? Is the dynamic likely to continue and grow into the future? A good example might be Airbnb, which has grown by leaps and bounds domestically and abroad despite the challenge of building a two-sided marketplace and initial skepticism of renting a stranger’s home.

The shift of the experience from experimental (at the least this will make for a good story) to utilitarian (I just want the most affordable/delightful/convenient stay) is key for unlocking hearts and wallets of the masses.

Getting back to this “one thing” – ignore the labels. Utilize focus to be one step ahead. Build a powerhouse, not a business.

ABOUT RRE

RRE Ventures is an early-stage venture capital firm headquartered in New York City. Since our founding in 1994 we have sought out and partnered with extraordinary entrepreneurs who seek to disrupt and transform industries.